Schwab Creates Low-Cost 401(k) Fund Choices

I used to work for a company in the financial services industry. Another branch of the corporation I worked for is involved with institutional money management. This department manages institutional investments like company retirement plans and pensions. This is a service they provided to other companies of various types, much like Fidelity and Schwab offer 401(k) management and administration to companies. This could be considered an in-house service, so as an employee of the company, my 401(k) plan was managed by this branch of the same company.

You would think that given the company’s standing within the financial industry, the 401(k) plan would include smart investment choices. Unfortunately, most of the funds available are high-priced, actively-managed mutual funds and annuity funds. There is one stock market index fund available, but its expense ratio is significantly higher than those of the low cost index funds found elsewhere. Nevertheless, I wanted to take advantage of the company’s matching contribution — after all, that’s free money — as well as the tax savings, so I relented and participated in the plan.

401(k) plans — and 403(b) plans available to non-profit and educational organizations — suffer from poor investment choices. They are often significantly more expensive than the index funds you can find for IRAs. A fund’s expenses play a significant role in an investor’s ability to grow wealth over time. A low-cost fund could save an investor over a hundred thousand dollars over the course of a career when compared to a similar fund with above-average expenses. Even taking inflation into account, this will be a significant amount of money.

Schwab has announced that they are now offering a selection of new 401(k) investment choices designed to cater to investors who are keen on keeping more of their money in a program called Schwab Index Advantage. It isn’t clear from the announcement whether the available funds will match what’s currently available to retail investors, but if they aren’t the same funds, they should be similar in cost. The Schwab S&P 500 Index Fund has an expense ratio of 0.09%, lower than even Vanguard’s competing retail S&P 500 Index Fund with 0.17%.

The brokerage also offers companies the ability to provide employees with investment advice and planning tools for an unspecified low cost. The GuidedChoice system will help employees make ongoing decisions regarding their retirement investing, and this should help employees save more for retirement. It’s individualized advice, which isn’t common with retirement plans. Most employees are lucky if their retirement plan comes with a web application that helps them determine an asset allocation strategy; individualized advice could, if the advice is good, help investors grow their nest eggs in a way that’s most appropriate for their goals.

Are you satisfied with your 401(k) retirement plan, its choices, and its included advice?

I am very satisfied with my choices in the company’s 401k plan as well as the match of up to 5% that they provide. But I know that the majority of people aren’t working as companies that have such good benefits. It is one of the reasons that I chose to work where I do, and people should always take benefits into consideration if they are lucky enough to have different job opportunities.

I have always maxed out my 401(k). I’ve faced some mediocre 401(k)s but none that were so terrible that they weren’t worth putting up with temporarily. The longest I’ve ever worked in one place was 4 years (four jobs in 13 years so far). As soon as I leave, I roll over the account to an IRA at a low-cost brokerage. My wife had one 401(k) that was so bad it wasn’t worth investing in at all. The account fee was 1.35% on top of any underlying mutual fund expenses. The money market option actually had a negative return.

My 403B options are filled with annuities except for a few mutual funds. Annuities typically have higher expenses , fees and generally have a load (front end commission). I often wonder if companies or organizations (school districts or non profits) care about their employees.

I think the issue that smaller companies and non-profits face is that offering a solid 401(k) program can be expensive… so while 403(b) plans are less expensive, the management companies offer higher-cost investments to make it worthwhile to administer smaller accounts.

I have a Vanguard 403(b) through my employer with a 4% match. If we do not choose a Vanguard fund, we get automatically enrolled in a Vanguard Retirement Fund based on our age (expense ratio range from 0.17% to 0.19%): https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList – It is a set-it-and-forget-it type of fund. Vanguard just adjusts your allocations over time. The expense ratio is higher than ETF equivalents, but for a company sponsored retirement account, it is the most convenient and low fee one I have personally encountered.

I also have a Schwab SEP-IRA from before. I’m sure Schwab will do a fine job with the 401(k). Every interaction I’ve had in person at various branches, over the phone, online chat, and e-mail have always been beyond satisfactory.

Most 401k participants have little or no knowledge of what their 401k plans cost. The participant-balance weighted average annual costs for all plan participants is approximately 0.9% of the plan balance (ICI.org). Costs for participants in small and medium sized plans are 1%-2%, with some even higher. Especially painful for conservative/stable value investors in this low interest rate environment.

Fortunately, new fee disclosure requirements are now in place and participants will begin getting easy-to-understand reports detailing the fees of each investment choice in their plan starting this year. Schwab is getting in front of this increased transparency with lower-cost options for participants in plans they help manage. This won’t help many participants so a rollover to an IRA is still worth considering after changing jobs or retiring.

I’m fortunate in working for a fairly large employer whose 401-k now includes five Vanguard index funds covering most major asset classes. A decade ago, the plan only included one index fund, but a few of us kept asking HR every few years about expense ratios and why not offer more index funds to help employees save more while staying diversified. Eventually a good 401-k plan got even better.

If employers don’t hear that employees care about the retirement plan and understand expense ratios, employers are likely to opt for the less expensive financial services supplier, who then just might make a lot of their profit on the plan off the expense ratio that employees pay — since the tax-deferment and perhaps match still make the 401-k a good deal for employees.

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